Whirlpool Corporation v. The Grigoleit Company

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0105p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellant/Cross-Appellee, -
WHIRLPOOL CORPORATION,
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Nos. 11-2348/2421
v.
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Defendant-Appellee/Cross-Appellant. -
THE GRIGOLEIT COMPANY,
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Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 1:06-cv-195—Paul Lewis Maloney, Chief District Judge.
Argued: November 29, 2012
Decided and Filed: April 12, 2013
Before: MARTIN, SILER, and DONALD, Circuit Judges.
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COUNSEL
ARGUED: Matthew T. Nelson, WARNER NORCROSS & JUDD LLP, Grand Rapids,
Michigan, for Appellant/Cross-Appellee. John M. Lichtenberg, RHOADES MCKEE
PC, Grand Rapids, Michigan, for Appellee/Cross-Appellant. ON BRIEF: Matthew T.
Nelson, Jeanne F. Long, WARNER NORCROSS & JUDD LLP, Grand Rapids,
Michigan, for Appellant/Cross-Appellee. John M. Lichtenberg, Alexander F. Denton,
RHOADES MCKEE PC, Grand Rapids, Michigan, for Appellee/Cross-Appellant.
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OPINION
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SILER, Circuit Judge. This case concerns a contract dispute between Plaintiff,
Whirlpool Corporation (“Whirlpool”), and Defendant, The Grigoleit Company
(“Grigoleit”). Grigoleit supplied knobs for Whirlpool’s washing machines and dryers
for several years, and it sought to increase prices and amend the parties’ purchase
contracts in late 2004. The parties reached an amended agreement in February 2005,
1
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which Whirlpool terminated later that year. When Grigoleit demanded final payment,
Whirlpool sued, arguing the contract was unenforceable. The district court upheld the
contract but found some aspects of it unconscionable. Whirlpool appeals the district
court’s holding that the contract is enforceable. Grigoleit cross-appeals, challenging the
district court’s holding that two provisions are unconscionable and its determination of
awardable damages. We AFFIRM IN PART, REVERSE IN PART, and REMAND
the case to the district court for further proceedings consistent with this opinion.
I.
Whirlpool manufactures home appliances and purchased from Grigoleit knobs
for its products for many years. The parties’ dealings were manifested in numerous
Blanket Purchase Orders, which established prices that would be charged if and when
Whirlpool issued a “release” for parts. Releases authorized Grigoleit to manufacture and
ship specific parts and indicated how many additional parts Whirlpool anticipated
needing over the next several weeks and months.
In 2003, Whirlpool announced the impending termination of all of the appliance
programs for which Grigoleit made parts. Grigoleit asked to participate in some of the
replacement programs but Whirlpool declined the request. Over the next year, the
volume of work received by Grigoleit from Whirlpool decreased significantly. Grigoleit
continued to supply the same range of parts, in smaller volume, and continued
manufacturing and shipping parts based upon daily releases, at prices set by Blanket
Purchase Orders which had not been amended since the 1990s.
On November 4, 2004, Grigoleit requested price increases, minimum volume
commitments, and changes in the manufacturing and shipping requirements from
Whirlpool. The next month produced little meaningful discussion, and on December 22,
Grigoleit warned that should Whirlpool refuse to negotiate, Grigoleit would be forced
to terminate their existing agreement and terminate all open Blanket Purchase Orders on
January 31, 2005. In response, Whirlpool asked that Grigoleit provide justification for
the price increases. The parties communicated over the next several weeks but were
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 3
unable to reach an agreement. During negotiations, Grigoleit demanded that the new
price terms, although not yet determined, apply retroactively to November, the time of
Grigoleit’s initial request for price increases.
The parties still had not reached an agreement by January 31, 2005 when the
Blanket Purchase Orders ended. At the beginning of February, Grigoleit shared its
concern that it was suffering “extrinsic costs” as a result of the ongoing yet unfruitful
negotiations. Grigoleit notified Whirlpool that it would impose a $10,000 charge for
every additional week beyond February 1 that the parties failed to reach an agreement.
The parties eventually executed an agreement at the end of February (the
“Agreement”) whereby Whirlpool agreed to purchase and Grigoleit agreed to supply a
much smaller volume of parts at increased prices. According to Whirlpool, it paid in
excess of $1.3 million due to the increases above the price it was charged by alternative
suppliers that eventually replaced Grigoleit. The Agreement included a flat fee of
$40,000 to account for the “extrinsic costs” introduced earlier by Grigoleit, price
increases, and an additional 8% surcharge on all parts covered under the Agreement in
lieu of applying the new prices retroactively to November. Paragraph 5 of the
Agreement covered liabilities and damages and is a point of much contention between
the parties. It reads:
Whirlpool is liable for all quantities of finished parts, components, and
raw materials that are processed and/or procured by Grigoleit in meeting
its obligations under previous and new blanket PO’s. Such quantities
may exceed the amount required to cover actual quantities of finished
parts shown on the Grigoleit order balance at a given time, e.g. minimum
buys of raw materials, etc. The total Whirlpool liability for quantities of
materials in excess of Grigoleit order balance shall not exceed $100,000
and shall be limited to obligations supported by Grigoleit inventory or
other records as follows:
a. Finished parts shall be paid by Whirlpool at ATTACHMENT A price.
b. In process components shall be paid by Whirlpool at Grigoleit stated
percentage of completion of ATTACHMENT A price.
c. Raw material, which includes purchased components, committed and
on hand shall be paid by Whirlpool at Grigoleit laid-in invoice price plus
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 4
thirty percent. Grigoleit shall ship any parts, components and raw
materials covered under this paragraph as directed by Whirlpool.
Paragraph 6, also a point of contention, authorized Grigoleit to ship Whirlpool parts
according to Whirlpool’s weekly releases. It stated that “in no event will Grigoleit be
required to hold as finished goods inventory more than 90 days.”
Business dealings between the parties proceeded under the Agreement until the
fall of 2005, when Whirlpool contracted Grigoleit’s remaining work to two other
suppliers and stopped issuing releases to Grigoleit altogether. Grigoleit notified
Whirlpool of inventories of finished parts exceeding 90 days in possession based on
Whirlpool’s existing releases and shipped them to Whirlpool. Grigoleit also computed
Whirlpool’s liability for parts still within Grigoleit’s possession pursuant to Paragraph
5 of the Agreement and invoiced Whirlpool to this effect.
Whirlpool refused to tender payment and filed suit in Berrien Circuit Court,
asserting that the Agreement was the product of economic duress. Grigoleit moved to
dismiss pursuant to Fed. R. Civ. P. 12(b)(6). The district court granted Grigoleit’s
motion, holding that a claim of economic duress cannot be predicated upon a party’s
threat to do that which it is legally entitled to do and finding that Grigoleit had an
indisputable right to terminate its purchase orders with Whirlpool. Whirlpool was
permitted to file an amended complaint.
In its amended complaint, Whirlpool asserted that Grigoleit’s termination of the
purchase orders constituted extortion and the Agreement had therefore been formed
under economic duress and was unconscionable. Grigoleit again moved for dismissal
and the district court found that threatening to terminate the contract was a lawful
exercise of Grigoleit’s rights. Since a claim of economic duress requires proof of illegal
action, Whirlpool could not sustain its claim. The district court also held that Whirlpool
had stated a claim that the Agreement was unconscionable, and Whirlpool filed a
second amended complaint which included a claim for damages on the theory of
unconscionability. Grigoleit counter-claimed for damages based upon Whirlpool’s
termination of the Agreement. Whirlpool then moved for partial summary judgment,
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 5
asking the district court to construe the damages provision of the Agreement. Whirlpool
contended that Grigoleit’s damages must be capped at Whirlpool’s volume commitment,
plus $100,000, as provided in Paragraph 5 of the Agreement. The district court found
that the Agreement did not support Whirlpool’s interpretation of its obligations to pay
for finished parts and that finished parts authorized for manufacture by Whirlpool were
subject to distinct purchase obligations under the Agreement, not confined to the
$100,000 cap of Paragraph 5.
The district court conducted a bench trial to determine whether the Agreement
was unconscionable and held it to be partially enforceable. It held that under the
Michigan Uniform Commercial Code, a commercial contract or one of its provisions
may be deemed unconscionable only upon a showing of both substantive and procedural
unconscionability. It found that the prices set under the Agreement were substantively
unconscionable because they were not supported by any evidence and, to the contrary,
evidence presented during the bench trial established that Grigoleit was already
pocketing a profit on its sales to Whirlpool prior to renegotiating prices. Only two
aspects of the price increases were found to also be procedurally unconscionable and
thus unenforceable. The district court found that Grigoleit hastily introduced the
$40,000 “extrinsic costs” charge and the additional 8% surcharge, which left Whirlpool
without a meaningful opportunity to negotiate or refuse them. It concluded that these
provisions were unconscionable and unenforceable.
Whirlpool appeals, arguing that the district court erred in holding that the
Agreement was not unconscionable. Whirlpool also challenges the holding that illegal
activity, as opposed to merely wrongful conduct, is required to assert economic duress.
Grigoleit cross-appeals the district court’s findings that the “extrinsic costs” fee and
additional 8% increase are unconscionable.
II.
Under Michigan law, unconscionability is a question of law left to the courts,
Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 323 (6th Cir. 1998), and we review
such holdings de novo. See also Gianni Sport Ltd. v. Gantos, Inc., 391 N.W.2d 760, 761
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 6
(Mich. Ct. App. 1986). However, unconscionability is determined by analyzing the facts
and circumstances present when a contract was made, and a court’s findings in these
regards are reviewed for clear error. Andersons, 166 F.3d at 323.
A. Unconscionability.
Whirlpool first argues that an agreement may be held unconscionable on the
basis of substantive unconscionability alone. Unconscionability is governed by Section
440.2302 of the Michigan Compiled Laws, which states:
(1) If the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the court
may refuse to enforce the contract, or it may enforce the remainder of the
contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable
result.
A court interpreting Michigan law must answer two questions when determining whether
contracts are unconscionable: “(1) What is the relative bargaining power of the parties,
their relative economic strength, the alternative sources of supply, in a word, what are
their options?; and (2) Is the challenged term substantively reasonable?” Allen v. Mich.
Bell Tel., 171 N.W.2d 689, 692 (Mich. Ct. App. 1969). These inquiries speak to
procedural unconscionability and substantive unconscionability, respectively. Clark v.
DaimlerChrysler Corp., 706 N.W.2d 471, 474 (Mich. Ct. App. 2005) (citing Nw.
Acceptance Corp. v. Almont Gravel, Inc., 412 N.W.2d 719, 723 (Mich. Ct. App. 1987)).
Whirlpool argues that unconscionability is determined on a sliding scale and that
a substantial degree of substantive unconscionability is alone sufficient to render an
agreement unenforceable, even absent a finding of procedural unconscionability.
Grigoleit responds that under well-settled Michigan law, both substantive and procedural
components must be established before an agreement will be held unconscionable.
Many courts employ a balancing approach to the question of unconscionability,
“and to tip the scales in favor of unconscionability, most courts seem to require a certain
quantum of procedural plus a certain quantum of substantive unconscionability.”
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 7
Citizens Ins. Co. of Am. v. Proctor & Schwartz, Inc., 802 F. Supp. 133, 144 (W.D. Mich.
1992) (overruled on other grounds) (emphasis added) (internal quotation marks omitted).
The Michigan Court of Appeals in Allen v. Michigan Bell recognized that
unconscionability requires “an absence of meaningful choice on the part of one of the
parties together with contract terms which are unreasonable [sic] favorable to the other
party.” 171 N.W.2d at 692 (emphasis added). Therefore, “merely because the parties
have different options or bargaining power, unequal or wholly out of proportion to each
other, does not mean that the agreement of one of the parties to a term of a contract will
not be enforced against him; if the term is substantively reasonable it will be enforced.”
Id. Likewise, “if the provision is substantively unreasonable, it may not be enforced
without regard to the relative bargaining power of the contracting parties.” Id.
Accordingly, federal courts consistently observe that Michigan law requires a party to
demonstrate both procedural and substantive unconscionability. See Pichey v. Ameritech
Interactive Media Servs., Inc., 421 F. Supp. 2d 1038, 1044-45 (W.D. Mich. 2006);
Citizens Ins., 802 F. Supp. at 144 (“[A] determination of unconscionability cannot be
made with respect to the subject provision based on its ‘substantive’ content alone, but
must be premised upon the ‘procedural’ factors.”).
In defense of its position that substantive unconscionability alone is sufficient to
deem an agreement unconscionable, Whirlpool cites to numerous courts from other
states that have endorsed this view. However, none of these cases comes from Michigan
or implicates Michigan law. Also, as Grigoleit correctly notes, most of these cases do
not arise under the Uniform Commercial Code, nor from contracts between commercial
parties. Because Michigan law is consistent and clear, the district court properly held
that both substantive and procedural unconscionability are required to hold an agreement
unenforceable.
1. Substantive unconscionability.
We need not determine whether the district court properly concluded that the
Agreement’s price terms are substantively unconscionable because we uphold the district
court’s finding of no procedural unconscionability on all terms except for the
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 8
$40,000 fee and the 8% surcharge, and we find the district court erred in finding
those two charges to be procedurally unconscionable. The question of substantive
unconscionability is irrelevant.
2. Procedural unconscionability.
Procedural unconscionability is determined by evaluating the bargaining power
of the parties, their relative economic strength, and their alternative sources of supply.
Gianni Sport, 391 N.W.2d at 761-62. “[T]he most important factors in determining
procedural unconscionability are (1) whether the relatively weaker party had an
alternative source with which it could contract, and (2) whether the contract term in
question was in fact negotiable.” Andersons, 166 F.3d at 324. Although courts should
not substitute their judgment for that of freely contracting parties, “[i]mplicit in the
principle of freedom of contract is the concept that at the time of contracting each party
has a realistic alternative to acceptance of the terms offered.” Nw. Acceptance Corp.,
412 N.W.2d at 723 (internal quotation marks omitted). As the Michigan Court of
Appeals explained in Northwest Acceptance Corp.,
Where goods and services can only be obtained from one source (or
general sources on noncompetitive terms) the choices of one who desires
to purchase are limited to acceptance of the terms offered or doing
without. Depending on the nature of the goods or services and the
purchaser’s needs, doing without may or may not be a realistic
alternative. Where it is not, one who successfully exacts agreement to an
unreasonable term cannot insist on the court’s enforcing it on the ground
that it was “freely” entered into, when it was not. He cannot in the name
of freedom of contract be heard to insist on enforcement of an
unreasonable contract term against one who on any fair appraisal was not
free to accept or reject that term.
Id. at 723–24 (internal quotation marks omitted).
We must determine whether the district court clearly erred in determining that
the $40,000 flat fee and 8% surcharge are procedurally unconscionable. First and
foremost in this discussion is our consideration that Whirlpool is a large, sophisticated
corporation, presumably capable of competent negotiation. “[U]nconscionability is
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 9
rarely found in a commercial context . . . .” Pichey, 421 F. Supp. 2d at 1045 (citations
omitted). In fact, agreements involving commercial parties on both ends have only been
found unconscionable in context of extreme, blatant, unavoidable inequities, such as
those where damages are limited even where a contract is wholly unperformed, See
Allen, 171 N.W.2d at 693, and those where parties are given no opportunity to review
or read an agreement before signing it, see Nw. Acceptance Corp., 412 N.W.2d at 721,
724. No such extreme circumstances are present here. As the district court observed,
Whirlpool failed to negotiate in good faith with Grigoleit until February 2005. In fact,
Whirlpool rebuffed and even ignored Grigoleit’s efforts to discuss modifying the parties’
contract until that time. The $40,000 flat fee and 8% increase, although agreed upon in
the eleventh hour, were not the result of strong-arming or foul play. Both fees
essentially represent payment for the delay in reaching an agreement, and that delay
could have been avoided entirely by Whirlpool. Because Whirlpool created its own
unfavorable circumstances, we cannot conclude that the terms it agreed to under such
circumstances were non-negotiable.
Moreover, Whirlpool proposed the $40,000 flat fee and 8% increase. It did so
to avoid paying even higher amounts in fees for the delay it caused by failing to
negotiate in good faith earlier. It is plainly illogical to deem terms unconscionable
where they were proposed by the complaining party itself and no allegations of fraud or
duress are presented. See Roussalis v. Wyoming Med. Ctr., Inc., 4 P.3d 209, 246 (Wyo.
2000) (“[W]e find it difficult to accept the notion that a party who proposes an allegedly
unconscionable term can be viewed as an innocent party who is oppressed or unfairly
surprised by a provision of its own making.”); Hill v. Hill, 380 S.E.2d 540, 546 (N.C. Ct.
App. 1989). Because Whirlpool proposed the $40,000 flat fee and 8% increase in lieu
of higher payments to Grigoleit for delays that Whirlpool itself caused, there is no unfair
oppression or absence of bargaining power in the parties reaching these terms.
Whirlpool’s strongest argument in support of finding procedural
unconscionability is that, because Grigoleit was the sole source of parts for a particular
line of washing machines and dryers, Whirlpool was left without an alternative source
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 10
from which to procure parts. Although it is true that Grigoleit was Whirlpool’s sole
supplier of knobs, this arrangement was by Whirlpool’s own design. As a Whirlpool
representative testified at trial, sole-source arrangements allow Whirlpool to avoid a
number of manufacturing and design costs. For this benefit, Whirlpool mindfully elects
to enter into such arrangements with its suppliers. In exchange however, Whirlpool
inherently accepts the risk that a disagreement with one of its suppliers may cause a
manufacturing delay. Therefore, Whirlpool’s inability to order the specific parts in
question from another supplier does not conclusively render the terms it agreed to
unconscionable. Furthermore, Whirlpool in fact did have other suppliers from which it
could purchase parts, as evidenced by its ability to replace Grigoleit as a supplier within
a few short months of seeking out alternatives.
Although the $40,000 flat fee and 8% increase may be unfavorable to Whirlpool,
the district court unmistakably erred in finding these terms procedurally unconscionable.
Whirlpool created the urgent and unfavorable conditions under which it proposed these
terms, and it had ample time and opportunity to negotiate more favorable terms. More
importantly, Whirlpool had the resources, experience, and ability to avoid these terms
entirely, yet chose not to do so.
3. Whether the agreement, partially or in its entirety, is
unconscionable.
As discussed above, both procedural and substantive unconscionability are
required in order to hold a provision or an entire agreement unconscionable. Having
found that the “extrinsic costs” charge and 8% surcharge are not procedurally
unconscionable, it follows that they cannot be held unenforceable. Moreover, because
these terms are not unconscionable, Whirlpool’s argument in favor of holding the entire
agreement unenforceable fails. Absent a finding of procedural unconscionability, there
are no grounds upon which we should consider whether the entire agreement is
unenforceable.
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 11
4. Certification of unconscionability question to the Michigan
Supreme Court.
In the alternative to concluding that the Agreement is unconscionable, Whirlpool
asks us to certify to the Michigan Supreme Court the issue of whether substantive
unconscionability alone, particularly as to an excessive price term, is sufficient to deem
an agreement unconscionable.
Pursuant to Michigan Court Rule 7.305(B), when “consider[ing] a question that
Michigan law may resolve and that is not controlled by Michigan Supreme Court
precedent, the court may on its own initiative or that of an interested party certify the
question to the Michigan Supreme Court.”
Whether substantive unconscionability may alone invalidate an agreement is not
an issue of first impression or unsettled Michigan law. As explained, Michigan law
requires a party asserting unconscionability to prove both procedural and substantive
unconscionability. See Pichey, 421 F. Supp. 2d at 1044-45; Citizens Ins., 802 F. Supp.
at 144; Allen v. Michigan Bell, 171 N.W.2d at 692. Therefore, we will not certify this
issue to the Michigan Supreme Court.
B. Economic duress.
Whirlpool also requests that we certify a question to the Michigan Supreme
Court regarding its claim of economic duress. In its complaint and first amended
complaint, Whirlpool asserted that the Agreement was a product of economic duress.
Whirlpool argued it only entered into the Agreement because Grigoleit threatened to
interrupt Whirlpool’s manufacturing operations by terminating Blanket Purchase Orders
as of January 31, 2005. The district court granted Grigoleit’s motion to dismiss this
claim on the basis that, under Michigan law, one seeking to avoid a contract claimed to
be the product of duress must plead illegal compulsion. Because Whirlpool failed to
plead “anything even remotely illegal or unlawful,” it failed to state an economic duress
claim.
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 12
On appeal, Whirlpool argues that although Michigan law currently requires
illegal action as an element of a claim for economic duress, a more recent dissent in the
Michigan Supreme Court suggests that the issue is unsettled. As early as 1881, the
Michigan Supreme Court held that illegal action is a necessary element of economic
duress. Hackley v. Headley, 8 N.W. 511, 512-13 (Mich. 1881) (“Duress exists when one
by the unlawful act of another is induced to make a contract or perform some act under
circumstances which deprive him of the exercise of free will.”). Since Hackley,
Michigan courts have repeatedly and consistently required illegal action to prove
economic duress. See e.g., Quartell v. Great Lakes Bancorp, No. 183368, 1996 WL
33347624, at *2 (Mich. Ct. App. 1996); Enzymes of Am., Inc. v. Deloitte, Haskins &
Sells, 523 N.W.2d 810, 814 (Mich. Ct. App. 1994), rev’d on other grounds, 539 N.W.2d
513 (Mich. 1995); Apfelblat v. Nat’l Bank Wyandotte-Taylor, 404 N.W.2d 725, 728
(Mich. Ct. App. 1987) (“Duress requires compulsion or coercion by which one is
illegally forced to act by fear of serious injury to person, reputation or fortune. Fear of
financial ruin alone is insufficient to establish economic duress; it must also be
established that the person applying the coercion acted unlawfully.”). More recently, in
Stefanac v. Cranbrook Educ. Cmty., Justice Levin, dissenting, noted that Michigan law
on economic duress “may have lagged behind” other states which no longer require
illegal action. 458 N.W.2d 56, 74 n. 40 (Mich 1990) (Levin, J., dissenting). Although
it is true that Michigan law may be different than that of other states, Justice Levin’s
remark on this issue does not suggest that it is unsettled, as argued by Whirlpool. To the
contrary, Justice Levin continues in his dissent to note that “fairly recent Michigan
cases” continue to cite and apply Hackley’s requirement of illegal action. Id. For this
reason, we decline to certify Whirlpool’s economic duress question to the Michigan
Supreme Court.
C. Damages limitation pursuant to the Agreement.
Whirlpool’s final argument on appeal concerns the district court’s interpretation
of damages pursuant to Paragraph 5 of the Agreement. Specifically, Whirlpool argued
in its brief that Paragraph 5 limits Whirlpool’s liability to $100,000. However,
Nos. 11-2348/2421 Whirlpool Corp. v. Grigoleit Co. Page 13
Whirlpool withdrew its position at oral argument and no longer challenges the district
court’s ruling. For this reason, we decline to review this issue on appeal.
III.
We AFFIRM the district court’s ruling that the Agreement is enforceable.
However, we REVERSE the district court’s holding that the $40,000 flat fee and 8%
increase are unconscionable and direct entry of a judgment in favor of Grigoleit on its
cross-appeal.